Greenspan: Fed Can Quit Raising Rates

December 6, 2000|By Richard W. Stevenson, New York Times

WASHINGTON -- Alan Greenspan signaled Tuesday that the Federal Reserve is finished with the job of raising interest rates to slow the economy and stands ready to cut rates should the nation show any signs of heading toward recession.

Greenspan, the central bank's chairman, said the economy has slowed appreciably from the boom conditions of the past few years to a "more sustainable" level. And while he gave no suggestion that the Fed sees a downturn on the horizon, he noted that with growth at a modest level there is less of a buffer should the economy be hit by bad news.

After months in which investors have become increasingly pessimistic about the outlook -- and after several days in which Gov. George W. Bush and his running mate, Dick Cheney, have publicly raised the possibility of economic trouble ahead -- Greenspan's comments seemed intended to reassure the markets that the Fed would step in as needed to keep the long expansion going.

If so, they had their intended effect. Stock prices surged after his remarks in a speech in New York to a conference sponsored by America's Community Bankers, the trade group for the savings and loan industry.

The Dow gained 338.62 points, closing at 10,898.72, and the Nasdaq posted its largest-ever one-day point gain, up 274.05 points to 2,889.80.

Analysts said Greenspan's comments made it likely that the Fed at its next meeting, on Dec. 19, would drop its policy bias toward higher rates and adopt the position that the risks of inflation are no greater than the risks of the economy's stalling.

But they said it was unlikely that the Fed would actually cut rates as soon as the next meeting. If rates are to be reduced, it would almost certainly not be until next year, they said, and then only if the economy shows continued signs of slowing.

The Fed has raised its benchmark federal funds target rate on overnight loans among banks by 1.75 percentage points in six steps since June 1999, to 6.5 percent.

The delayed effects of the tighter monetary policy have come at the same time that the stock market has been swooning, banks have been tightening up their lending standards, and the bond market has been making it more difficult for all but the most financially stable of companies to raise money.

Economic indicators in the past few months have shown that growth has decelerated abruptly and now appears to be running at or below a 3 percent annual pace, a full percentage point below what most analysts think it is capable of sustaining without generating inflation.

There are signs that the unemployment rate is creeping up, reducing the chances of a sharp rise in wages that might ignite inflation.

"For some time, growth in aggregate demand exceeded even the productivity-enhanced expansion of potential supply," Greenspan said. "More recently, though, the pace of expansion of economic activity has moderated appreciably, in part as tighter financial conditions have had some impact on interest-sensitive areas of the economy."

Greenspan said financial conditions are not so tight as to be a crisis, as they were in 1998, when the Fed had to cut rates in the wake of the global financial crisis.

But he said the Fed had to be wary of problems.

"In periods of transition from unsustainable to more modest rates of growth, an economy is obviously at increased risk of untoward events that would be readily absorbed in a period of boom," Greenspan said.